The Right Mix of Mutual Funds for You

By Janet Bodnar, Editor-at-Large
From Kiplinger's Personal Finance, May 2015

In our January issue, I wrote that my daughter, Claire, had asked me where she and her husband, Zach, could get a higher rate on their savings. Unfortunately, I had to tell them that in this market, earning 1% or so in the bank is about the best that you can do (see Best of the Online Banks). But a longtime reader, Herbert Alleman of Silver Spring, Md., offered a refreshingly positive spin: "If one uses coupons and other incentives to buy needed products, the real savings is the money in your pocket that you don’t have to spend," he writes. For example, he figures he can save as much as 19% on groceries by using a supermarket rewards card. "If I save 19%," he says, "then I make 19%. I count my blessings and don’t worry about what the bank offers in interest rates."

Mr. Alleman’s point of view is a reminder that there’s more than one way to boost the return on your savings. Another option, albeit a riskier one, is to invest money in the stock market that you don’t need right away. That, in fact, is what Claire and Zach decided to do. They left enough for an emergency cushion in their savings account and divided the rest among four mutual funds, including two index funds and two actively managed funds, one of which is Homestead Small-Company Stock. The Homestead fund is a member of the Kiplinger 25, the list of our favorite mutual funds.

That’s not likely to continue. “As the Federal Reserve slowly abandons its ultra-easy monetary policy, investors are likely to focus less on the stock market’s attractiveness relative to other asset classes and more on the strengths and weaknesses of individual companies,” writes Nellie.

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That spells opportunity for active fund managers, and the Kip 25 attempts to spot the funds that can capitalize on it. Among the things we look for, low fees top the list. That’s the best way to compete with index funds, whose low costs give them an advantage. For example, all three funds that are new to the Kip 25 this year have expense ratios that are lower than the average among funds in their class. One of those funds, T. Rowe Price Diversified Small-Cap Growth, replaces Baron Small Cap, cut from the list because, in Nellie’s view, its expense ratio of 1.30% is too high given its $5 billion in assets.